Aberdeen Smaller Cos Income held its nerve through pandemic – Aberdeen Smaller Companies Income Trust has published results for the year ended 31 December 2020. Over the year, the trust returned -4.1% in NAV terms, just ahead of the Numis Smaller Companies Index which returned -4.3%. Share price performance was slightly behind the benchmark with a return of -5.1% over the year.
The revenue account was hit hard by widespread dividend cuts in the wake of COVID-19. Revenue per share fell to 5.60p from 9.98p. The company has dipped into revenue reserves to keep the dividend close to the 2019 level, with the total dividend for the year being 8.24p (2019: 8.25p). [We aren’t sure why they bothered to cut it by 0.01p, especially since it still has 11.2p per share of revenue reserves left.]
Drivers of returns
The managers’ report says that: “Stock selection was a significant contributor to the outperformance of the Trust over 2020. We made no significant style changes throughout the pandemic, nor did we turnover the portfolio.”
“Games Workshop has been a consistent positive contributor to performance throughout the year, trading well despite Covid-19 disruption. The business has shown strong growth in recent years as the adoption of its table top gaming hobby has been enhanced through innovation and development, whilst social media has improved customer recruitment. The hobby is now fairly mature in the UK, but is in development stage in many other parts of the world where Games Workshop are experiencing strong growth.
The vertically integrated business is rich with IP and exclusive product. Management have made many operational improvements in recent years, sharpening price points and innovating with new high quality products. An increased marketing drive, together with better customer interactions through social media, has resonated with existing customers, attracted new ones and reactivated lapsed ones.
Following the government announcement of full lockdown restrictions, all stores, factories and workshops were closed. Trading short term was impacted, but management made the necessary changes in their warehouses to meet social distancing requirements and began to make trades sales across Europe and America. Online orders restarted in May, with stores following depending on local government guidelines. Although the business effectively stopped trading for a period the appetite for at home entertainment accelerated in lockdown and management were successful in driving their online presence and hobby engagement to drive the number of active users. Product marketing has become far slicker and more compulsive, both in terms of the product itself and the marketing. Management innovated with virtual vouchers to offer attractive discounts and to explore new areas of the product range, and flexed delivery options. Games Workshop issued a number of stronger than expected updates during the year, partly reflecting pent up demand but also from the strong product line up in the period and a greater proportion of sales through trade and online. Upon reopening operations around May, the business momentum returned to the strong pathway seen pre-Covid, and even strengthened. There was also news of a further licencing agreement, with Frontier Developments for a real time strategy game based on Warhammer Age of Sigmar. The shares again reacted well, as this further demonstrated the broadening of IP monetisation, with license revenue streams being very high margin. Supported by the strong trading performance, the Board has declared dividends similar in quantum from prior years, but the timing of payments was slightly different.
We are confident that the quality of the business and the top line growth opportunity will continue to support upgrades, with product innovation, international growth and license deals all improving. We expect the business to continue to deliver robust earnings growth in coming years which in turn will drive dividend growth.
XP Power (XPP) is a manufacturer and supplier of power converters to the Industrial, Semiconductor, Technology and Healthcare markets. Their core AC-DC product converts alternating current from the mains to direct current, this is required for virtually all electrical equipment. The market had worried XPP would see a sharp fall in revenue and profits given the supply chain disruptions and potential facility closures. There was some conciliation in April when XPP released a strong trading update demonstrating they were more resilient than the market feared, as demand for their products remained robust. Given the critical nature of some of their customer’s products, they were able to continue to manufacture throughout the crisis, and did so operationally well despite some supply chain uncertainties. The healthcare division saw unprecedented demand and the recovery in semiconductor continued. Following others in the sector, XP cautioned on the outlook at this stage and withdrew the final dividend. We had more good news at the interims in August showing sales growth was sustained and order momentum strong, allowing them to end the period with a record order book. The dividend was reinstated at this stage reflecting management confidence. We saw another upgrade in October confirming that they were capitalising on a much larger opportunity as the strength of order wins continued. The cash performance continued to impress with net debt reducing. This balance sheet strength, along with the availability of liquidity, underpinned the proposed Q3 dividend. The strong trading performance illustrates the benefit of diversity of end markets and the mitigation of the cyclicality of individual end markets. It was also announced that long-standing CEO Duncan Penny will retire and will be succeeded by current CFO Gavin Griggs. We see the change as evolutionary, and do not foresee any major change to the strategy, which is serving the group well.
We saw a strong contribution from Liontrust Asset Management. This year they have delivered extremely strong flows, supported by fund performance over the long term. Liontrust is demonstrating that they are taking share from peers that lack the focus, brand, and investment performance they demonstrate. Fund investors do want active management and are willing to pay for it where they believe value is being added. Liontrust has an expanded range of funds which appeal to investors and is delivering the benefits of consistently applied investment processes with strong monthly flows. During the second half of the year we had an update from the company showing extremely resilient inflows despite the expected Covid-19 AUM hit from markets. The net inflows achieved in an extremely difficult quarter show the resilience of the business and the quality of the product offering, brand and distribution. The Sustainable Investments and Economic Advantage teams saw high levels of net inflows and investment performance remains top quartile for a majority of their funds over 1, 3 and 5 years. The shares reacted positively to the continued momentum in flows and the payment of the dividend, as well as the acquisition of Architas, a multi manager business which further diversifies Liontrust and expands their addressable market.
Hollywood Bowl detracted from performance in the period. This business had traded consistently well before the pandemic thanks to their strategy of constantly investing in the customer proposition. However, bowling was included in the category of ‘close proximity’ venues which lead to protracted periods of closure. The business remained profitable in FY20, managing costs down, preserving cash and bolstering its balance sheet with a capital raise, which we supported. Demand has proved resilient in the short periods in which they were allowed to open and the business adaptable, remaining profitable even under restrictive trading conditions. Importantly, its strategy remains intact with innovation, refurbishment and expansion expected to drive top line and margin growth. Through investment in PuttStars, a mini golf experience, they have also broadened their addressable market, and given the confidence gained during the short trading periods this year they are rolling out more sites. While the shares rallied towards the end of the year upon news of the vaccine, sentiment worsened upon the news of lockdown 2, in early November.
Cineworld was a detractor from performance given the weak news flow around cinema attendance numbers particularly in the US early in 2020. We’d already been reducing this position in 2019, and were concerned that lower revenue growth would slow the de-levering of the balance sheet and therefore exited the holding early in 2020 on quality and growth concerns.
James Fisher is a leading provider of specialised services to the marine, renewable energy, oil and gas and other high assurance industries. The group has compounded high levels of growth over long periods of time, but over their FY19 the business was impacted by some challenges in its largest division, Marine Support, and by Covid-19. Initially the market believed the business to be later cycle so less correlated with the oil price and so more resilient and early in the year management felt confident to pay a dividend. Then upon re-instating guidance the full impact of Covid-19 and the related fall in oil prices and oil industry profitability impacted both the non-carbon and carbon fuel parts of the business. Subsequently, because of concerns that the balance sheet might be stretched, the shares didn’t recover with the oil price. The business is broad and rarely do all cylinders fire simultaneously, but its industry leading position in a number of structural growth markets is likely to keep the growth engine running for many years. We see upside potential to forecasts from a steeper recovery in the oil price and oil industry profitability than assumed, causing demand to normalise in the Marine Support division and continue its improvement in the Offshore Oil division. We also believe the new CEO will reinvigorate the business, both through the focus on top line growth as well as ensuring the cost base is efficient.”
ASCI : Aberdeen Smaller Cos Income held its nerve through pandemic